Investment update 9 July 2018

Last week in the markets

Over the past week Australian shares rose 1.3% with small company shares down 0.4%. Shares in developed countries rose 1.2% with the US up 1.5%. Shares in emerging markets declined by 0.9%. The Australian dollar rose 0.3% to 74.30 US cents. The Australian 10-year bond yield fell slightly to 2.62%, with the US 10-year bond yield declining to 2.82%. The oil price dropped by 0.5% to 73.80 US dollars per barrel.

Lessons on analysis from the World Cup

Gross domestic product (GDP) is a commonly used measure of the size of a country's economy. GDP is the total value of everything produced by all the people and companies in the country. The GDP of a country is influenced by many things, including the country’s size, population and its output.

Historically, large or politically aspirational countries have tended to showcase their wealth in the global arena via sporting achievements, and typically spend more money on funding sport and its development as well.

The most striking example of this is the Summer Olympics, where somewhat unsurprisingly the United States is the undisputed king, having won over twice as many Olympic medals as runner-up Russia since the games began. Obviously, the dissolution of much of the former Soviet Union has influenced this, as have wars, boycotts and other political developments over time. Surprisingly, Hungary and Sweden have fared much better than the size of their relative economies and populations would suggest, with the ninth and tenth highest Olympic medal hauls over the same period.

The soccer World Cup will soon be decided. So how have wealthy countries fared historically in the ‘the world game’? Surprisingly, five of the ten wealthiest countries in the world (by GDP) have never won a World Cup, but, economic lightweights Uruguay and Argentina have each won two. Perhaps this is because soccer doesn’t require specialised equipment or fields; it can be played in just about any environment – so money doesn’t present an obstacle. This means that countries with a large population, and national obsession with soccer, should be able to do well. Of course, while not an obstacle, money sure helps with talent development.

Such analysis also masks the economic growth and decline of some countries. For example, China has become the second largest economy in the world recently. While China’s economy continues to grow, there is little doubt that it will continue to grow its share of Olympic gold medals as well. It‘s also a very aspirational soccer nation, with a huge population to select athletes from.

Sporting outcomes and their relation to underlying economics does not provide much insight into investment returns. However, such analysis does make clear that focussing on a single factor (like GDP or population) rather than their interactions may lead to incorrect conclusions. That’s why we use measures like GDP-per-capita (GDP divided by the number of people in the economy). We also watch changes rather than levels. For example, we’re more concerned with economic growth, population growth and changes in demographics than absolute levels.

We’re not in the business of forecasting the winners of sporting events. At the time of writing we know that that the winner of this year’s World Cup will be either France, Belgium, Croatia or England. Neither Belgium nor Croatia are in the G20 list, but history shows that it would be unwise to bet against them on that basis.

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